Explicit solution simulation method for the 3/2 model

DOI10.1007/978-3-030-85325-9_8MaRDI QIDQ2080170zbMATH OpenOpenAlexFDO

Authors Iro René Kouarfate, Michael A. Kouritzin, Anne MacKay

Publication date 7 October 2022

Full work available at URL https://arxiv.org/abs/2009.09058

zbMATH Keywords

3/2 modelexplicit solutionsMonte Carlo simulationsnon-affine volatilityoption pricingstochastic volatilityweak solutions

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Stochastic models in economics (91B70) Interest rates, asset pricing, etc. (stochastic models) (91G30)

Abstract: An explicit weak solution for the 3/2 stochastic volatility model is obtained and used to develop a simulation algorithm for option pricing purposes. The 3/2 model is a non-affine stochastic volatility model whose variance process is the inverse of a CIR process. This property is exploited here to obtain an explicit weak solution, similarly to Kouritzin (2018). A simulation algorithm based on this solution is proposed and tested via numerical examples. The performance of the resulting pricing algorithm is comparable to that of other popular simulation algorithms.

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Cited in

(5)

• Exact simulation of the 3/2 model
• A simulation study of Sylvester's problem in three dimensions
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• Antithetic multilevel Monte Carlo method for approximations of SDEs with non-globally Lipschitz continuous coefficients
• Polar coordinates for the 3/2 stochastic volatility model

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